Posts Tagged ‘credit crunch for dummies’

So basically all the banks lent loadsa money to people and businesses. And then realised that they needed to have some money themselves, so borrowed loadsa money from other banks. And they lent this too, to people and businesses. But they got re-payed by the people and businesses and so with this new money, they lent LOADS of money to people and businesses, and gave some to other banks who lent that money to other banks and people and businesses whilst borrowing from other banks.

Confused. Of course you are. Because that doesn’t make any sense. And that’s the version with interest rates, hedge funds and all that financial jargon stuff taken out.

So let me explain what actually happened.

The Credit Crunch Explained

So there are lots of banks. Who have lots of money. And this money is in suitcases.

(If your confused already, maybe your beyond hope, but otherwise, your 75% of the way already. Told you this would be easy.)

Loadsa Money

The banks lend people and businesses suitcases full of money and then (eventually, usually after some angry letters) they get their suitcase back. Banks also lend each other suitcases full of money. Generally this is all very happy; rabbits hop around in fields, birds sing in the trees and people are able to get huge personal loans to purchase vast quantities of illegal drugs. It’s a glorious, capitalist world.

However, one day, someone at one of the banks did something really fucking stupid.

In the corner, were a huge pile of suitcases, which contained of course, all the banks money and assets.

(On second thoughts, maybe they were in a safe. Actually, no, that’s bollocks, this is all metaphor anyway, I’m sticking with corner.)

Those suitcases were completely different from the ones the bank started with years ago as obviously, they had been on the happy capitalist merry-go-round, being lent and borrowed from people, businesses and other banks.

Anyway, that’s not a problem because the bank was pretty sure how much money it had, how much it’s assets were worth, what it’s loans were worth and so on.

But then, one fatal day which was probably a Tuesday (I hate Tuesdays), some idiot at the bank thought they had better actually do something because their job didn’t consist of doing anything except harassing customers when they walked in the front door. So he, or she, thought they’d have a quick check and so opened up a suitcase with a big £1million loan sign on it, only to find a half eaten sandwich and a copy of Razzle.

Finding out that something you think is worth £1million actually consists of some mouldy bread and some very suspicious looking stains on a titty mag is pretty upsetting, I’m sure you’ll agree. Much more upsetting was the fact that the girl (It was definitely a girl, the Garden of Eden analogy is too much of an open-goal for me not to shoot) opened a bunch more suitcases with similar tags on them, only to find a few pennies and a used pair of unisex underwear, at which point she immediatly reported to her superiors (who were men).

Shit

News spread and before long, another bank had opened up all their suitcases to find nothing but some dust and quite upsettingly a dead leprechaun (who even more upsetting, had no gold).

Before long, banks the world over began to realise that their big pile of suitcases worth $300billion dollars might be worth not $300billion dollars but absolutely fuck all.

And that, is how the whole financial meltdown started and why banks are refusing to lend anyone any money.

Gameshow Analogy

So, as I have shown, the credit crunch has been caused essentially because the banks have lost a massive game of Deal or No Deal.

You pick a load of suitcases and you cross your fucking fingers that they have something good inside.

The banks who picked some really shit suitcases, are the people who on Deal or No Deal end up going home with jackshit, much to the amusement of the nation.

However, when banks like Lehmann Brothers did it, it was slightly less amusing, because they have all your money. And it turns out that they have swapped it for a suitcase with a half eaten banana in it.

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